Member Article

On September 26, 2013 the Supreme Court released its decision in the Envision¹ case. The case deals with the amalgamation of two credit unions, but has broader implications for the tax treatment of amalgamations in Canada, and will be of interest to Canadian corporations contemplating a merger in the future.

In 2001, two BC credit unions amalgamated to form Envision. The transaction was undertaken for non-tax reasons, but structured to obtain a particular tax outcome. The amalgamation was carried out under the Credit Union Incorporation Act² (“CUIA”). Under the CUIA, an amalgamated credit union is the continuation of its predecessors, and deemed to be “seized of” all the property andliabilities of its predecessors.

The relevant provision of the Income Tax Act³ (“ITA”) dealing with amalgamations is section 87. Amalgamations which meet the criteria of section 87 of the ITA are known as “qualifying amalgamations”.Those which do not are known as “non-qualifying”. The distinction is important,because the tax results of a qualifying amalgamation are specified by section 87 of the ITA. The tax consequences of a non-qualifying amalgamation are notand, as confirmed by the Supreme Court, this means that a taxpayer must look to other provisions of the ITA, other statutes and to the common law to determine the outcome.

There are three requirements of a qualifyingamalgamation:

1.       All of theproperty of the predecessors must become property of the successor by virtue ofthe merger;

2.       All of theliabilities of the predecessors must become property of the successor byvirtue of the merger; and

3.       All of theshareholders of the predecessors must receive shares of the successor becauseof the merger.

Generally, a taxpayer will look to complete aqualifying amalgamation because these are designed to occur on a tax-deferredbasis. In the Envision case, the predecessor corporations wanted tocomplete a non-qualifying amalgamation. They believed that this would result intwo tax advantages, one of which is specific to credit unions, the other ofwhich was an increase to the amount of capital cost allowance which thesuccessor could take.

To achieve the desired result, the transaction wasdesigned such that the beneficial interest in certain real property wasintended to pass, at the precise moment of the amalgamation, to a subsidiary.The subsidiary issued shares in exchange for the beneficial interest in realproperty, which shares passed to the successor corporation by virtue of theamalgamation. Envision argued that it had created a non-qualifying amalgamationsince not all of the property of the predecessors became property of thesuccessor (breaching condition #1) – some of the property became property of asubsidiary.

The Supreme Court disagreed. It looked first to theCUIA, which deems the successor credit union to be seized of all the assets andliabilities of the predecessor. The court then concluded that this was amandatory provision, which the predecessors of Envision could not contract outof by virtue of a provision in the amalgamation agreement. The court was clear:‘there is no independent common law power that permits credit unions toamalgamate in a manner that would contradict the terms of the CUIA.’⁴ Accordingly, Envision was seized of the real property at the exact moment ofthe amalgamation, satisfying the condition of section 87 of the ITA. Theproperty was successfully transferred to the subsidiary, but it was done so byEnvision as their successor (which was specifically contemplated by thetransfer agreement).

Canadian corporations considering a merger in thefuture should look first at the relevant corporate law statute, to see whetherassets and liabilities pass automatically. If they do, section 87 may wellprovide certainty as to the tax consequences. Corporations may prefer to planinto that provision, since it provides a degree of certainty thatnon-qualifying amalgamations do not: the Supreme Court declined to comment onhow tax attributes of a successor corporation should be calculated for anon-qualifying amalgamation. It is also open to the Ministry of Finance tosupplement the ITA, by adding a comprehensive scheme for non-qualifyingamalgamations.

For more information, please contact GarethWilliams at 604.685.3456 or a member of our Tax Group.